Foreign exchange trading (TIẾNG ANH KINH tế SLIDE)

Nominal and real exchange rates• The nominal exchange rate e is the price in foreign currency of one unit of a domestic currency.. • The real exchange rate RER is defined as , RER = eP

FOREIGN EXCHANGE TRADING

Foreign Exchange

• money or currency of a foreign country

of the home nation’s currency.

• For example an exchange rate of 102 Japanese yen (JPY,

¥) to the United States dollar (USD, $) means that JPY 102

is worth the same as USD 1 The foreign exchange market

is one of the largest markets in the world By some

estimates, about 3.2 trillion USD worth of currency

changes hands every day.

• The spot exchange rate refers to the current

exchange rate

• The forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date.

Nominal and real exchange rates

• The nominal exchange rate e is the price in foreign

currency of one unit of a domestic currency.

• The real exchange rate (RER) is defined as ,

RER = e(P/Pf )

where Pf is the foreign price level and P the

domestic price level P and Pf must have the same arbitrary value in some chosen base year Hence in the base year, RER = e.

Gold standard

• A monetary system used in the nineteenth and early

twentieth centuries whereby the value of currencies could,

on request of the owner (holder), be converted in to gold

at a country’s central bank As all currencies had a gold value, they also had a certain value in relation to each

other This was the beginning of a foreign exchange

system

Bretton Woods system

• The Bretton Woods system of moneytary management established the rules for

commercial and

financial relations among the world's major

industrial states in the mid 20th century The Bretton Wo

ods system was the first example of a fully negotiated mo

netary order intended to govern monetary relations among independent nation-states

Central Bank

• A country’s chief bank, which is government owned It

regulates the commercial banks and holds gold and

foreign currency reserves It actively intervenes by buying and selling its own currency in the foreign exchange

markets so that the currency will keep a certain value

Functions of a central bank

• controlling the nation's entire money supply

("lender of last resort")

gold reserves and the Government's stock

register

• regulating and supervising the banking industry

• setting the official interest rate – used to manage both inflation and the country's exchange rate – and ensuring that this rate takes effect via a

variety of policy mechanisms

Naming of central banks

Many countries use the "Bank of Country" form

(e.g., Bank of England, Bank of Canada, Bank of Russia).

 Some are styled "national" banks, such as the

National Bank of Ukraine;

 Central banks may incorporate the word "Central" (e.g European Central Bank, Central Bank of

Ireland)

The word "Reserve" is also often included, such as the Reserve Bank of Australia, Reserve Bank of

India, Reserve Bank of New Zealand, the South

African Reserve Bank, and U.S Federal Reserve System

Fixed exchange rate

• A fixed exchange rate, sometimes called pegged

exchange rate, is a type of exchange rate regime wherein

a currency's value is matched to the value of another

single currency or to a basket of other currencies, or to another measure of value, such as gold

Floating exchange rate

• A system in which currencies have no specific par value; value is normally determined by supply and demand

Central bank are not required to intervene, but they often

do to avoid wild fluctuations

Fiat currency

• Fiat currency (fiat money) is money declared by a

government to be legal tender The term derives from the Latin fiat, meaning "let it be done" Fiat currency achieves value because a government requires it in payment of

taxes and says it can be used to pay debt or buy goods and services and because people trust that the value of the currency will be reasonably stable

Legal tender

• Legal tender or forced tender is payment that, by law,

cannot be refused in settlement of a debt Legal tender is issued by the Government

Spot transaction

• Currency bought or sold today with delivery two business days later

Forward transaction

• To buy or sell a currency in the future, with payment and delivery at that future date

• To offset a “buy” contract with a “sell” contract and vice versa, matching the amounts and the time span exactly

• When dealers do not offset a “buy” contract with a “sell” contract This means that their position is left open

• The transfer of funds from one currency to another to

benefit from currency differentials or disparities in interest rates In arbitraging, at least two market are enter

• The additional amount it will cost to buy or sell a currency

at a given future date (relative to the spot or today’s price)

• The lesser amount it will cost to buy or sell a currency at a

given future date (relative to the spot or today’s price).

There are some key dates in the development of exchange rate systems around the world (1944, 1971, 1973, 1992, 2002)

Match the dates with the events :

However, governments and central banks occasionally attempted to influence exchange rates by intervening in the markets So there

was a system of managed floating exchange rates.

protect the value of the pound sterling After this, governments and

central banks intervened much less, so there was almost a freely

floating system.

currencies were pegged to the value of the US dollar The American central bank, the Federal Reserve, guaranteed that it could

exchange an ounce of gold for $35.

the euro, to replace their national currencies.

had enough gold to back to dollar, due to inflation.

B fix its value in relation to it.

C make a profit by making capital gains

or by investing at higher interest rates

D is determined by supply and demand

E trying to insure against unfavorable price movements by way of futures contract

F the determination of price by supply and demand ( the quantity available and the quantity bought and sold).